Peer2Peer Finance News December 2018

FUNDING CIRCLE’S GLOBAL EXPANSION PLANS

>> 5

The platform has a shortlist of overseas markets IFISA SPECIAL REPORT

The evolution of the game-changing tax wrapper

>> 10

Octopus Choice’s Sam HandfieldJones on advisers, tech and talent >>

24

ISSUE 27 | DECEMBER 2018

SME finance aggregator quits Bank Referral Scheme ONE OF the first business finance aggregators to take part in the Bank Referral Scheme has quietly left the government initiative.

Sources close to the Treasury have told Peer2Peer Finance News that Business Finance Compared left the scheme in spring 2018, and while the departure was amicable there was some frustration in the department due to the efforts that had been made to onboard the platform. >> 4 It is thought that

RateSetter dips toe into Open Banking RATESETTER is trialling several partners to help it tap into the opportunities presented by Open Banking.

Michael Hoare, head of credit at the ‘big three’ peer-to-peer lender, said that the platform is working with “a couple of different” parties, as it looks to utilise Open Banking for application assessments and lending decisions.

“We are starting to dabble in Open Banking,” Hoare told Peer2Peer Finance News.

“You can’t just jump into it though. We will make a decision on our partner in the new year.”

Hoare said he expected more firms to develop products and services using Open Banking once aggregators such as MoneySupermarket begin to adopt the data-sharing initiative.

This would then feed into the products and platforms that users select through comparison websites, he added.

A number of P2P lenders have already started using Open Banking, which mandates banks to share anonymised customer data with approved third parties.

Uptake has increased in recent months, as more

application programming interfaces (APIs) have become available, making it easier to access data held by banks.

P2P consumer lenders Lending Works and Zopa are already using Open Banking, in order to automate the credit application process and verify income respectively.

Additionally, business P2P lender Growth Street >> 4 has launched an

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EDITOR’S LETTER

03

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Danielle Levy Reporter PRODUCTION Tim Parker Art Director COMMERCIAL Ashleigh Sadler Director of Sales and Marketing ashleigh@p2pfinancenews.co.uk Amy St Louis Sales and Marketing Consultant amy@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Support tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk

P

eer-to-peer lending hasn’t been getting the best press at the moment. Some platform-specific issues have come under the spotlight, resulting in the entire industry being tarred with the same brush.

While savvy Peer2Peer Finance News readers know that this industrywide critique is unfair, there is a risk that people who are less familiar with the sector may be put off from investing or borrowing via P2P platforms.

So it was good to see some positive news in the second half of last month. The Cambridge Centre for Alternative Finance released a report which showed that transaction volumes across the UK’s alternative finance sector swelled by 35 per cent year-on-year to £6.2bn in 2017. P2P drove much of this growth, with P2P business lending alone smashing through the £2bn barrier last year.

Furthermore, the report showed that P2P business lending accounted for 29.2 per cent of all new bank loans to small businesses in 2017.

This growth is validation of the industry’s growing popularity, as it becomes an essential part of the financial ecosystem.

Long may it continue!

SUZIE NEUWIRTH EDITOR-IN-CHIEF

Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers.

Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

Have you signed up to our e-newsletters yet? You can receive P2P news straight to your inbox five days a week, or sign up for our once-a-week version that comes out on Wednesdays.

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04

NEWS

cont. from top of page 1 Business Finance Compared has decided to focus on more innovative products using Open Banking. There are no plans to onboard a new finance aggregator to the scheme as a replacement.

The Bank Referral Scheme was launched in November 2016, mandating nine of the UK’s high-street banks to pass on the details of rejected business borrowers to designated finance aggregator platforms, who can then make referrals to alternative finance firms such as peer-topeer lenders.

The designated aggregators are now Funding Xchange, Funding Options and Alternative Business Funding, which was added in November 2017.

However, the scheme has been the target of criticism due to perceived low takeup. In October, MPs on the Treasury Select Committee called for wider promotion of the initiative to ensure that small- and mediumsized enterprises (SMEs) are aware of alternative finance options available.

Government figures showed that fewer than three per cent of small businesses referred to alternative lenders via the scheme obtained finance in its first nine months following the launch, but more recent data in the 12 months to August 2018 showed the conversion rate is now above 10 per cent.

It is thought that the Treasury is happy with the take-up of the scheme and notes that the figures

are not reflective of the whole alternative business finance market.

The other designated aggregators are understood to be happy with the scheme and are seeing growing volumes of business, so have no plans to leave.

And P2P lenders have reported successful results from the scheme.

In August, Alternative Business Funding facilitated a £250,000 loan

to a developer through Blend Network after the borrower had been rejected by Barclays.

P2P lender JustUs has been trialling the scheme through Funding Options and is happy with the results.

“We get daily referrals and probably accept double the amount of applications than those that come direct as they are already filtered,” said Lee Birkett, founder of JustUs. “It has been a success for us and we are in discussions with the other aggregators.”

Business Finance Compared, the Treasury, Funding Xchange, Funding Options and Alternative Business Funding declined to comment.

cont. from bottom of page 1 API that lets users access its GrowthLine product through the Starling Bank app.

A report earlier this year from accountancy firm PwC predicted that Open Banking could become a £7.2bn revenue opportunity by 2022, but said there is still work to do on boosting awareness among businesses and individuals.

“Open Banking is a potential game changer for individual and corporate consumers,”

Jonathan Turner, financial services payments leader at PwC, said.

“It provides an opportunity to transform the public’s interaction and everyday experience with the financial services industry. But there are still many ‘hard yards’ to travel. Few disruptive propositions have been developed so far.”

Open Banking mirrors the EU's Payment Services Directive II. Both sets of legislation aim to create more

Michael Hoare, head of credit at RateSetter

competition in the banking industry and encourage innovation.

Under the UK rules, the nine banks with the largest market share are

required to adopt and maintain common API standards through which they will share data with other providers and third parties.

NEWS

05

Funding Circle prepares overseas target shortlist FUNDING Circle has a shortlist of five countries it is interested in expanding into, its chief strategy officer has revealed.

The peer-to-peer business lending giant already operates in the UK, the US, the Netherlands and Germany. But Lisa Jacobs (pictured), chief strategy officer at Funding Circle, told Peer2Peer Finance News that the firm is now considering new geographies.

She said there are four factors that Funding Circle considers when entering new markets: demand for small- and medium-sized enterprise (SME) borrowing;

investor sentiment; operational complexity including the regulatory environment; and credit data availability.

Jacobs said the firm could enter new markets via organic expansion or acquisitions. Funding Circle entered the German market by acquiring Zencap in 2015.

“Our aim is to help small businesses grow and become the first choice for small businesses globally,” she said.

Jacobs declined to comment on specific regions but appeared to rule out areas such as eastern Europe, Africa and Asia for now, due to a lack of accessible data.

“Most P2P lenders in these types of regions are focused on the short term,” she said.

“It is important for us that a region has accessible credit data so that we can maintain our own long-term lending business model.”

Jacobs also said that Funding Circle may

consider launching investment funds in different countries, in order to diversify its funding sources.

Within its home market, Funding Circle is not focusing on any specific regions or sectors, Jacobs said. However, she added that the platform’s data is “automatically indexing” to areas where banks have pulled away such as the north east and north west of England.

“There is a myth that we are the lender of last resort,” she said.

“People are coming to us out of choice because of the speed of our proposition and convenience.”

Insolvency reforms bring secured loans into focus THE TYPE of security taken by some peer-topeer lenders has come under the spotlight amid proposed insolvency reforms.

Chancellor Philip Hammond announced in his 2018 Budget last month that HMRC would return to preferred creditor status in business insolvencies to ensure tax is collected. The taxman previously had preferred status but it was removed in 2002.

The reform puts HMRC ahead of creditors that

have a floating charge as security, which could include some P2P lenders.

Rural P2P business lender Folk2Folk said it does have floating charges in some cases, but also takes a fixed charge over land or property which takes first priority on a creditor list.

“In some circumstances we take a debenture in the form of a fixed or floating charge as additional security and may also take directors’ guarantees on a loan to a company,” a spokesperson said.

Others take different approaches. Funding Circle said it has floating charges on a small minority of its larger loans but as most of its business is unsecured, it tends to focus on holding personal guarantees, which means they can pursue a company director or whoever is a named guarantor.

Rather than a security, RateSetter takes ownership of an asset as part of its business lending.

Some believe the

insolvency reforms may present an opportunity for P2P lenders.

“The significant issue will be the banks’ response and whether HMRC’s upgraded status will further dampen appetite to lend to small firms,” said Stuart Lunn, chief executive of Edinburghbased P2P business lender LendingCrowd.

“This is potentially a significant opportunity for alternative lenders to gain market share, as they can step in when banks are unwilling to lend.”

For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk.

With real-time news and exclusive insights, www.p2pfinancenews.co.uk is your indispensable portal into the world of peer-to-peer lending.

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NEWS

07

Draft Brexit deal would expose NI fintech sector to “unnecessary risk” THE DRAFT agreement on EU withdrawal will leave Northern Ireland’s rapidly growing fintech sector exposed to “unnecessary risk,” an industry expert has warned.

Peter Oakes, founder of trade body Fintech Ireland, said that the draft terms of the EU Withdrawal Treaty offer “nothing positive” for fintech businesses in the province, as they do not resolve the question of passporting rights for the financial services industry.

“I can tell you there is nothing positive in [the

draft agreement] for either the UK or Northern Ireland when it comes to the outward passporting of financial services,” Oakes told Peer2Peer Finance News. “Their challenge is to ensure that their government actively engages with the EU to find a suitable way forward.

“Fintech in Northern Ireland has grown exponentially with some incredibly smart people setting up some incredibly innovative firms and what we don’t want to see is Northern Ireland firms being forced to take on unnecessary risk because

of a cliff-edge Brexit.”

Oakes’ comments tally with the fears of small businesses and fintech operators across Northern Ireland.

According to recent research from the CBI, more than 90 per cent of the business group’s Northern Ireland members believe that the proposed backstop is a better outcome for the Northern Irish economy than ‘no deal’.

Meanwhile, prominent fintech firms such as AI manufacturer Neurovalens have warned that they may be forced

to leave Northern Ireland after Brexit.

Northern Ireland has developed a reputation as a fintech hub in recent years, thanks to a combination of low corporate taxes, low overheads, and a large graduate population.

Over the past year, peerto-peer lenders such as Assetz Capital and Blend Network have increased their presence in the region, while Belfast is home to P2P-facing broker Clearpath Finance, crowdfunding platform CoFunder and SME lender Linked Finance.

ETHLend in talks to provide crypto software to UK P2P lenders ETHLEND is in talks with peer-to-peer lending platforms in the UK about providing technology that will enable them to offer crypto-backed finance.

The crypto P2P lender – which lets borrowers request loan amounts and post other digital currencies as collateral as well as paying interest on the loans – has already started providing its software for a Swiss P2P platform called Cashare and is now working on an entry into the UK. It also ran an initial coin offering last year, creating a tradeable LEND token that can be used to pay transaction fees.

Stani Kulechov, founder of ETHLend, declined to reveal which P2P lenders he was speaking with in the UK, only to say they tended to be mid-sized than larger firms.

“The advantage of

this type of borrowing is that someone with cryptocurrency may still want exposure to the asset but needs money to pay a bill,” he said.

“By borrowing on ETHLend they will be able

to post the cryptocurrency as collateral while they borrow and repay a loan, therefore keeping their asset and also avoiding any tax on having to sell it.”

ETHLend also plans to open a London office near to Old Street – known as Silicon Roundabout – which would house 10 members of staff.

The platform currently has almost 200 active loans and its loanbook is worth more than $2m (£1.5m).

Additionally, its founders are working on a separate platform that will let users pay bills in different forms of cryptocurrency.

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09

Making the most of your assets

Narinder Khattoare, chief executive of peer-to-peer property platform Kuflink, explains why it is so important to vet every borrower

I

N THE WORLD of propertybased peer-to-peer lending, the term ‘asset security’ has become shorthand for the sort of collateral that can essentially guarantee the lender’s capital investment.

Yet recent events in the P2P landscape have shown that when it comes to asset security, there can be a huge gap between expectations and reality.

Despite the fact that property is a much less volatile security than other assets, many investors can still be misled by eye-wateringly high rates. As Narinder Khattoare, chief executive of Kuflink, warns: “In a scenario where you’re earning, say 15 per cent per annum, you have to question what kind of interest the borrower is paying and the security in place for investors.”

This is why the P2P property platform is on a mission to clarify the true meaning of asset security, and what investors should look for

down to the expertise of the board of directors and the credit committees sanctioning these deals, and whether they have the right experience of assessing and agreeing opportunities.”

Kuflink’s vetting process begins with a trusted network of brokers, before moving through a strict process of due diligence that weeds out riskier loans.

“ It all comes down to the expertise of the board of directors and the credit committees ” when determining the security of a loan.

“What tends to happen is that borrowers want to borrow as much as possible against the asset by putting less of their own money against the loan,” explains Khattoare. “It all comes

In fact, Kuflink’s process is so strict, that Khattoare estimates around 70 per cent of loan applications are knocked back at this initial stage. Of the remaining 30 per cent, another 50 per cent or so will drop off later in the process.

Kuflink will always have a conversation with borrowers regarding their assets and liabilities, as well as detailing the exit date of the loan and any future needs.

“We then get a fully complete application brought into us supported by relevant documentation,” explains Khattoare. “That's where you start to build a picture of the borrower profile. Our background checks will flag any adverse credit issues.

“Then we sit down with our credit team to assess the application, which then goes to a second credit committee and on to solicitors before any money is lent.”

This tough process combined with the platform’s own promise to do “sensible lending” at “competitive rates” means that Kuflink stands apart from those lenders who lend too much against assets that do not stand up to scrutiny.

And it clearly works. Kuflink strives to ensure that borrowers have enough equity left in their portfolio to support an easy refinance, and as a result of this their investors have seen no losses to date.

“What we want to do is provide a facility that enables people to grow their portfolio or business, not lose the security assets,” adds Khattoare. “That's what works for us as a business and it works for our investors.”

10

IFISA

Coming of age

Tax-free peer-to-peer investing was once a pipe dream, but now, thanks to the Innovative Finance ISA (IFISA), it is a multi-million-pound reality.

Marc Shoffman examines how the IFISA market has evolved

I

T WAS A SPRING DAY in March 2014, when then-Chancellor George Osborne stood to deliver his Budget speech amid rumours of an overhaul of the tax treatment of peer-to-peer lending.

There had been calls for months before to expand the ISA tax wrapper to the P2P sector, with platforms such as Lending Works proposing the idea of a Lending ISA. Nothing was revealed in the speech, so it wasn’t until financial journalists and P2P platforms dug into the actual document that, on page 46, it became clear Osborne and the Treasury had listened.

“ISA eligibility will be extended to P2P loans, and all restrictions around the maturity dates of securities held within ISAs will be removed,” the document said.

Zopa co-founder Bruce Davis, who was one of the early advocates for the policy, says the sector had proved it had an important place in the savings and investment market.

“The industry had demonstrated the relevance and value of alternative investments to mainstream investors but was unable to compete on a level playing field with listed investments which had access to the stocks and shares ISA,” he explains.

“The launch of the IFISA opened up the sector to new investors for

whom their ISA is their central vehicle for making long-term investments. This has allowed us to compete with mainstream platforms more directly.”

Jeffrey Mushens, technical policy director for the Tax Incentivised Savings Association (TISA), affirms that the IFISA provides the perfect match for investors and borrowers.

“ This has allowed

us to compete with mainstream platforms more directly

”

“Investors needed a broader range of investment options and borrowers needed a greater supply of lending capital,” he says.

“Provided business practices are legitimate, the IFISA can play a vital role in driving investor and borrower choice.”

A government consultation followed in December 2014 and the Treasury confirmed in July 2015 that the IFISA would be introduced from April 2016, with crowd bonds eligible within the product from November 2016.

There were 81 responses to the consultation, broadly in favour, from firms such as crowd bonds platform Abundance, which was also co-founded by Davis, P2P consumer lenders Lending Works and Zopa, and P2P business lender Funding Circle.

Despite all the fanfare, a blockade in the road was approaching as the Financial Conduct Authority

IFISA

(FCA) was taking over regulation of the sector.

As a result, existing firms – many of which had supported the idea of an IFISA in the consultation and even started planning their product releases – were put on interim permissions. This meant they could not offer the tax wrapper until they had been fully authorised by the FCA and subsequently gained ISA

manager status from HMRC. This meant that in the first year of the IFISA, established players such as Zopa and Funding Circle were still awaiting full authorisation, while newer players got authorised and entered the market more quickly.

One of the beneficiaries of this was Abundance, which as a crowd bonds platform operated under different

11

and pre-existing regulations.

This meant it was one of the first platforms to offer the IFISA in 2016, and raised £10.5m in the first year. P2P buy-to-let lender LandlordInvest – which launched in 2016 – was another of the first providers, attracting almost half a million pounds of subscriptions in the first tax year of the IFISA. “The IFISA has meant that

12

IFISA

more investors have subscribed or transferred their ISA allowances to platforms and therefore supplied more funds to fund more loans,” Filip Karadaghi, chief executive of LandlordInvest, said.

“Platforms are better off as they get more revenue and borrowers can access quick financing.”

Despite the fanfare in the early days of the product, it attracted just £36m of subscriptions across 7,200 accounts for the 2016/2017 tax year, a drop in the water compared with the eight million cash ISAs and 2.5 million stocks and shares ISAs opened in the same year, valued at £39bn and £22bn respectively.

This was attributed to the absence of the big brands such as Zopa, Funding Circle and RateSetter, and the difference was clear once these players were authorised and had launched their IFISAs for the 2017/2018 tax year.

“

The most important thing for investors is choice and quality

”

HMRC figures recorded £290m of IFISA subscriptions for the 2017/2018 tax year across 31,000 accounts, a 705.5 per cent increase.

This impressive growth led the industry to hail the popularity of the product.

Investors can now enjoy tax-free earnings via platforms offering a variety of loans, such as buy-to-let mortgages on Landbay, business finance on Funding Circle and personal loans on Zopa.

IFISA rates vary, with Landbay offering 3.54 per cent on investments held within the wrapper, while asset-backed lender Ablrate and short-term consumer loans provider Welendus offer

returns of up to 15 per cent.

However, it is important to consider not just the rates but also the type of loans, any security and the default and arrears rates, when choosing an IFISA. There are now 86 IFISA managers, a long way from the handful approved when the IFISA first launched in April 2016.

Not all are pure P2P lenders.

For example, investors can earn 7.5 per cent by backing British heritage projects funded by investment manager Oaksmore.

It issues bonds secured on historic buildings that are then restored and sold on to repay investors.

Other IFISA providers have offered film or social impact projects as investment opportunities.

This may be a different prospect to P2P, but platforms say they are welcome in the IFISA family as long as it is clear what investors are backing.

IFISA

“What matters to investors is the return that they can earn, the track record of the provider, the underlying asset and transparency,” Karadaghi explains.

“Although most investors recognise the difference between P2P platforms that offer an IFISA product, and other IFISA providers, we do not believe that it has any larger impact on investors’ choice of allocation.”

Davis adds that there are similarities across different IFISA providers.

“There is now a high degree of overlap between the P2P and investment worlds in terms of risk,” he says.

“Investors seem more than able to navigate the choices and assess the benefits of different assets offered and different services offered by each platform.”

The IFISA has clearly created more choice for investors, but industry onlookers say there are still issues to address.

Investment comparison website OFF3R thinks that the product is disadvantaged by only allowing

consumers to invest new money into one IFISA each tax year.

However, you can still open other IFISAs with different providers and transfer ISA funds from previous tax years.

There are ways around this restriction by investing with IFISA providers such as Goji, which offers a direct lending bond targeting returns of five per cent that invests via a number of alternative lenders.

OFF3R adds that investors are also held back by not being able to transfer existing P2P investments into an IFISA. Additionally, P2P analysis firm 4th Way has warned that the technological advancement of the sector is slowed down by any ISA transfers having to be completed by post, which means investors could miss out on opportunities.

HMRC has also been criticised for the way it records the data, with the first year of statistics revised substantially from an original figure of £17m and the latest data listed as incomplete.

13

Providers are still broadly positive however.

“We have seen strong growth – particularly from the small- and medium-sized platforms – which is good for competition and innovation in the sector,” Davis says.

“Average investment levels are up, as are customer loyalty measures.

“The IFISA will continue to offer value for money for small investors who are less able to absorb the trading charges of conventional platforms which erode their returns.

“I hope that it will remain a vehicle for small investors to take control of their investments and encourage more competition in the type of investments being offered, particularly ones which give more scope to align investor ethical values with investor returns.”

It must also be remembered that the IFISA is still very much in its infancy. As it approaches its third year, Mushens insists that there are positives to be taken from the way it saves tax for investors and boosts the P2P brand.

“The impact on P2P platforms has been great,” he asserts. “Not only has it saved tax for investors, it has also meant that more mainstream investors are going to P2P platforms.

“Moving any sort of tax wrapper or product into the mainstream takes time. But we hope this process for the IFISA isn’t too far away for both direct and advised investors.

“The most important thing for investors is choice and quality, followed by the necessary investor protections.”

With 86 providers and almost £290m invested in the previous tax year, there is clearly plenty of demand and choice available as the market starts to come of age.

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JOINT VENTURE

15

Quality doesn’t happen by accident Uma Rajah, chief executive and co-founder of CapitalRise, explains how the platform chooses its loans…

I

T’S NOT EASY maintaining a loanbook which has no defaults or losses to date. But prime property lender CapitalRise has turned loan selection into a fine art. An art that has helped return over £4m to investors to date.

CapitalRise only lends against prime property developments, predominantly across prime central London and the Home Counties – and that’s not by chance.

“Prime central London is the most resilient part of the UK property market,” says Uma Rajah, chief executive and cofounder of CapitalRise.

“If you look at the last 50 years of data, you can see that after the 1989 and 2007 downturns, prime central London property bounced back at least three years faster than wider London and the UK overall. In fact, prices in the rest of the UK are only now approaching pre-2007 levels.”

The team behind CapitalRise’s bespoke selection process has unparalleled experience when it comes to the prime property lending market. The people who screen the platform’s deals have been in the sector for at least 20 years and bring very specific knowledge of these assets and locations, which gives CapitalRise a big advantage in a competitive market.

There’s no shortage of developers seeking finance in London, so the big challenge is whittling down the longlist to a small selection of viable investments.

“We look at supply and demand in

particular, because we don’t want to be lending to a project where there's already oversupply in the market for those assets,” says Rajah.

“We review the developer's appraisal thoroughly – from timescales to floor plans, assessing whether what they're proposing to do is sensible, realistic, and has a clearly identifiable target end-user market.

“We then look in a lot of detail at the track record of the borrower.

This includes obtaining references, making site visits and reviewing their previous projects to see if they can achieve the quality levels that you need for these kinds of projects.”

With all this information to hand, the team will then assess the viability of the opportunity, before engaging third parties to complete a valuation and survey and finally to draft a loan agreement.

All this completed, the CapitalRise team begins a “very detailed financial analysis,” to ensure the project’s parameters are

suitably stress-tested and affirmed.

“It’s so important that the borrower has skin in the game – they need to put at least 10 per cent of the costs in themselves, and that's non-negotiable to us,” explains Rajah. “The reason why a loan often won’t proceed to formal credit committee approval is that the borrower hasn’t been able to secure the equity required to make the deal happen.”

With such a strict selection process, it’s only natural that CapitalRise rejects more than it approves. In fact, Rajah estimates that within the last six months, the platform declined more than £1.3bn worth of loans.

However, when you have an unblemished track record and a team of industry experts, you can afford to be a little more selective. In fact, testament to their belief in the quality of CapitalRise opportunities, Rajah confirms that the founders of CapitalRise personally invest in every single one.

16

TECHNOLOGY

Competitive advantage

Peer-to-peer lenders’ innovative use of technology is what first set them apart from the banks. But as the industry matures, what are they doing to maintain their competitive edge? Danielle Levy investigates

M

ORE THAN 13 YEARS have passed since the first peer-to-peer lending platform, Zopa, opened its doors in the UK. During this period, the rate of technological change has been rapid – and the growth of the fintech sector is a testimony to this.

Looking ahead, with Open Banking and Artificial Intelligence (AI) still in their infancy, P2P platforms are going to find it difficult to stand still.

Neil Faulkner, founder of P2P analysis firm 4th Way, believes that growing competition from platforms and challenger banks will foster

further technological development in the P2P lending sector.

“I would say they all need to step up because they are going to face more competition on the borrowing and lending side from platforms and newer digital banks,” he says. “The competition will force them all to enhance their

TECHNOLOGY

technology to make it smoother and more automated.”

So what does the future look like for P2P technology?

Open Banking presents the P2P sector with a huge growth opportunity, according to Faulkner. The initiative, which was introduced in January 2018, allows big banks to share customers’ transaction data with third parties.

This should ultimately improve competition and pave the way for

businesses will become more important.

“This will mean a focus on developing API and data protocols and increasing the efficiency of transaction flow,” he adds.

Stuart Law, chief executive of Assetz Capital, also views Open Banking as a significant development for the P2P sector.

In order to truly capitalise on the opportunities presented by the initiative, he predicts that some

“ They all need to step up because they are going to face more competition ”

new products and services.

A number of P2P lenders are already utilising Open Banking. Zopa has launched an income verification tool that automatically pulls in customer data made available through the data-sharing initiative.

Meanwhile, Lending Works has partnered with credit reference startup Credit Kudos to provide its Open Banking infrastructure. This will automate the process of applying for credit on the platform by removing the need to manually fill out forms and upload documents.

Faulkner expects that platforms will start to offer more financial tools which drawing on the application programming interface (API) data which is now available from banks, with some shifting towards banking.

Jonathan Hodge, chief operating officer at RateSetter, notes that as P2P becomes an established element of the financial services eco-system, "interoperability" and the need for P2P platforms to work efficiently with other financial services

platforms will introduce AI. “To make proper use of Open Banking data, you are going to have to start looking at AI and other things that can make sense of lots of bank statement pages that are electronically connected,” he explains. “I think that with Open Banking comes, in many cases, the need for AI.” While Assetz Capital does not currently use AI, he says it is on the platform’s ‘project list’.

Combined with Open Banking, Chris Hancock, chief executive of Crowd2Fund, expects to see greater use of blockchain technology in the P2P space.

“There are benefits to having a globalised, standardised financial database that everyone can plug into,” he says. “It is secure and noncorruptible, with the objective of reducing money laundering, crime and fraud. It is a no brainer. From a regulatory perspective, I predict that any financial institution will be forced to integrate with the blockchain.”

Crowd2Fund is already reaping

17

the benefits of using AI. Firstly, it underpins the platform’s ‘Smart Invest’ feature, which automates the process of loan selection for time-poor investors, based on their profile and attitude to risk.

Secondly, the platform uses AI and big data to automate their due diligence process when deciding which businesses to provide loans to.

“We analyse the 101 different variables for every business,” he explains. “It allows us to approve or reject businesses for listing on the platform much more quickly and accurately. It also allows us to augment third-party data into the system, so we can make more accurate decisions.”

Finally, Crowd2Fund uses AI software from Australian fintech firm InDebted to assist with debt recoveries. It uses big data analysis and algorithms to forecast which loans could become delinquent.

With already-delinquent loans, it will also work out the likelihood of that loan being recovered.

Crowd2Fund applies this technology to synchronise business data on its platform, which then sends time-sensitive triggers to businesses that are in arrears to prompt them to make payments.

“We have noticed an uplift in investor confidence in our recovery process and our ability to minimise defaults over the longer term,” Hancock adds.

Another area where Hancock sees big opportunities is mobile – an area of technology that the industry has been surprisingly slow to tap into.

It has certainly been high on the agenda for Crowd2Fund for a long time and continues to be.

The company was the first debt crowdfunding platform on Apple’s App Store when it launched in 2016.

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TECHNOLOGY

Close to 50 per cent of Crowd2Fund's users have an iOS phone and 50 per cent of those use the app.

"The app usage has steadily increased and we can also tap into new pools of investors," Hancock says.

Assetz Capital’s Law also highlights mobile as an area to watch. In the future, he says that platforms will need to invest heavily in mobile app development – and this means “traditional software won’t hack it”.

“There is a big overriding thing that people don’t spot: younger

“ With Open Banking comes, in many cases, the need for AI ”

people do not use computers,” he asserts. “They only use phones and they expect a simple user-interface on a phone.

“We are talking about an entirely different suite of software that is required if you want to engage younger people. That may not matter to a business today, but eventually over the years core users or borrowers are going to be of that generation.”

Another development to look out for is a potential move towards white label technology solutions, particularly for new entrants.

“Who on earth would start from scratch now reinventing the wheel when you can launch fast with an affordable, secure, reliable service?” asks Jude Cook, chief executive of white label software provider ShareIn. Cook says that ShareIn is

TECHNOLOGY

currently seeing strong demand for technology to assist with Innovative Finance ISA (IFISA) administration. She estimates that 80 to 90 per cent of new clients require IFISA functionality.

Faulkner agrees that a shift towards white-labelling could lie ahead. He suspects that it will become an extra revenue stream for platforms with established technology.

While it can help a new entrant to get up and running quickly, he believes it does not represent a good long-term solution. For example, if a platform decides to change its model as it learns from its users, it will require flexibility from its technology to do so.

“It is not something you would expect a platform to do forever,” Faulkner explains. “If they want to grow, they will need to move things in-house, so they have control over their unique selling points (USPs).”

Assetz Capital’s Law echoes Faulkner’s sentiments. “White label has its place, but it is not for companies that are trying to create any USPs from the technology,” he adds.

This explains why Assetz Capital has developed all of its systems inhouse, including loan management

and money management.

“Anything that is core to our business functioning well, then we write it and control it in-house,” Law explains.

Nevertheless, this means the company’s research and development budget is sizeable.

19

“Having a controlled immigration and talent system means that we can have more engineers from around the world, not just Europe,” he states. “But it is still important to make sure that the engineers that are here are looked after.”

Looking ahead, Faulkner suggests

“ White label has its place, but it is not for

companies that are trying to create any USPs from the technology One of the challenges associated with keeping technology in-house is making sure you hire the right talent; Law notes that the UK’s plan to leave the EU next year has made this process more difficult.

“It has been pretty tough since Brexit,” he adds. “We have had European applicants cancel job offers, which means we have had to outbid other people. We are contributing to IT salaries continuing to go through the roof in the UK.” However, Crowd2Fund’s Hancock takes a different view. He thinks that after the UK leaves the EU, it could widen the pool of technology specialists coming into the country.

”

that a number of platforms will up their game by investing further in their technology.

“To compete and survive there is going to be a continual race to lower costs and that is going to involve smoother technology,” he comments. “Some platforms still have ad hoc secondary markets, which aren’t really automated or they manually authorise payments.

Technology is going to need to make things smoother.”

Faulkner’s comments are mirrored in a recent white paper released by identity verification solutions provider Mitek, authored by fintech research firm Autonomous NEXT. The report urged digital lenders to invest further in their technology, in order to cut costs and take market share away from traditional banks.

A know-your-customer and anti-money laundering check could cost as much as $150 (£117) per customer, the report said, which could be reduced by up to 70 per cent by investing in digital identity verification solutions.

P2P platforms are well versed in technological innovation and disruption – skills that will help them evolve and thrive in an increasingly competitive market.

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JOINT VENTURE

21

“If I were chancellor…”

As the dust settles on Philip Hammond’s latest Budget, Andrew Turnbull, managing director of Wellesley Group, explains how a property-friendly Budget might look…

T

HE 2018 BUDGET held few surprises. But one theme was noticeable by its absence – there was very little news for property developers, borrowers and lenders.

“This wasn't really a property Budget,” says Andrew Turnbull, managing director of Wellesley Group.

Turnbull describes the 2018 Budget as having been “broadly neutral” for marketplace lenders who focus on the property sector.

But he has some suggestions on how the Budget could help property lenders and borrowers alike.

Stamp duty Chancellor Philp Hammond stated that there would be a consultation on increased stamp duty for foreign buyers. But while Turnbull admits that it would be easy to increase taxes for foreign owners of expensive houses, adding that “it would be a good idea politically”, he is not convinced that it is in the best interests of the country as much foreign capital supports the building of lower-cost housing.

“The overseas capital that is flowing into our regions supports a lot of the development that's occurring,” he says.

“These foreign investors are actually supporting the sale of smaller flats and houses that are then being rented out to local renters.”

Turnbull suggests that an overall reduction in stamp duty would be “a shot in the arm” for the higher end

personal allowance (from £11,850 to £12,500) should encourage more people to buy property.

“Developers tend to create housing for people who have middle incomes and that's quite a significant difference for them,” says Turnbull. “Essentially what it really comes down to is the ability to afford mortgages.”

of the housing market.

“If I were chancellor, I would probably be hiding that in my back pocket because it really would act as a stimulus if they were to reverse that,” he adds.

Help to Buy “The extension of the Help to Buy scheme is very welcome,” says Turnbull. “I think many house builders and lenders will be happy about that extension.

“But one concern that we have been focusing on is how to wean people off it. When that does happen, Hammond is going to have to choose his timing carefully to make sure it doesn't have a significant impact on the economy and the housing market.”

Personal allowance Turnbull adds that the increase in the

House building Last year’s Budget promised to fund the creation of 300,000 new homes across the UK. But this year, there was scant mention of housebuilding initiatives.

Turnbull says: “We want to see an increase in housing stock in the UK because there's a lot of discussion about improving planning permission and the process that developers have to go through there.”

Brexit Ongoing uncertainty over Brexit presents a potential problem for the UK’s property market, according to Turnbull.

“One of the things that lenders really don't like when supporting projects is fluctuating housing prices,” he says. “For lenders, stable prices are important. They're very happy with housing prices that remain flat.”

His ideal Budget would have included some reassurance for investors, should Brexit create economic insecurity.

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23

Boosting the IFISA through customer-driven technology

Angus Dent, chief executive of ArchOver, explains how the platform’s investment in technology has the customer at its core

P

EER-TO-PEER LENDING requires secure, scalable, easy-to-use technology. It’s vital for providers to deliver a secure, user-friendly experience for their investors. This is non-negotiable in the new world of consumer-driven finance.

When dealing with other people’s money, it’s crucial to ignore the popular ‘move fast and break things’ approach to development, and be guided by the need to build secure systems that meet the needs of both lenders and borrowers.

When we launched our Innovative Finance ISA (IFISA), building the right technology to support that service was essential. We made sure that investors looking to maximise their tax-free allowance were able to do so securely, quickly, easily and smoothly.

Go forth and innovate One of ArchOver’s biggest changes so far was the advancement of payments processing. When we started out, we did everything manually and so, too, did our customers. A clunky experience of moving between systems that we, in partnership, quickly updated to enable faster, more fluid payments processing. Now, our platform enables users to pledge at the touch of a button.

All of our investors need a simple, secure user interface, whatever their interest, age or background.

By offering an IFISA that can also be integrated into our automated portfolio-style Investment Plan, we enabled ISA-loving millennials to engage with P2P and alternative finance in a streamlined, efficient way – whilst at the same time keeping our traditional investors happy.

We have invested a great deal of time and resources in our technology, and will continue to do so – both financially, and in support of our platform development team – as it is this success that underpins our business.

We weren’t just jumping on a bandwagon when we made these changes to our payments processing, like the finance firms deploying disruptive technology on a whim. It’s important to stay on top of new technologies, but not all technology is fit for purpose. Take blockchain: we know it can boost security, but tech leaders need to ask themselves what it can actually offer a business that other types of

technology can’t. We considered the possibilities but decided its impact wouldn’t have the long-term pay-off we wanted, compared to innovating our payments.

Instead, we saw an opportunity to take advantage of the data we hold from onboarding and vetting to implement new policies and approaches. For us, this takes the form of recognising when a new service will meet the requisite demand to make the outlay worth it - in the same way it did when we launched our IFISA. We can start using big data to predict upcoming trends that might affect our business, and then develop the best services for our customers.

When it comes to the IFISA, there’s a problem with education – our research found that over half of consumers (57 per cent) don’t understand it. As we enter the next ISA season, we will look to leverage our data to improve our services and encourage more take-up of the IFISA across our platform – without compromising on data security.

Future of finance As we continue to build our IFISA customer base, it is crucial for us to be on point with the latest technology. Discovering new tech-driven solutions is one thing, but finding those that offer the most benefits for both the customer and the business is the key to real success.

24

PROFILE

Method of choice

Octopus Choice has done the unthinkable and wooed the adviser market.

Sam Handfield-Jones, head of the peer-to-peer property lender, tells Danielle Levy how it’s done

M

ORE THAN twoand-a-half years since peer-to-peer property lender Octopus Choice launched, it has succeeded where other platforms have failed: namely, by gaining traction with the financial adviser market.

Today, more than 1,000 advisers are registered on the Octopus Choice platform and it represents the most popular P2P platform for advisers in the UK. While consumers can also invest via the platform, Octopus Choice was set up to cater for growing demand amongst advisers and their clients for an alternative to cash and mainstream asset classes, like equities and bonds. Advisers currently make up 60 per cent of the platform’s user-base, with direct clients accounting for the remaining 40 per cent.

“The whole approach was: how can we build a product that works for advisers? We hit the pavement and met as many people as possible to help us shape how we built the product,” explains Sam HandfieldJones, head of Octopus Choice.

The ultimate objective was to build a platform which offered advisers and their clients a healthy yield, generated by property-backed loans that are underwritten by sister company Octopus property.

“We wanted to build something that met customer

expectations, and would be a reliable and positive addition to a client’s portfolio,” HandfieldJones adds. “By that I mean an alternative to sit between cash and equities, a lower volatility part of a client’s portfolio.”

Octopus Choice puts together a portfolio of loans on behalf of the customer, targeting an interest rate of around four per cent a year.

Since launch in 2016, Octopus Choice has funded more than 400 loans, totalling close to £200m.

Around 71 per cent of these loans are for buy-to-let properties, 16 per cent are bridge-to-let, eight per cent are commercial and six per cent are bridging loans. Meanwhile, the average loan-to-value for commercial property stands at a maximum of 65 per cent, while for

PROFILE

residential it is 76 per cent.

“Octopus Choice allows you to get a yield from property without the hassle and with much more diversification,” explains Handfield-Jones. “Plus, because you are lending you are taking less asset risk, so you are less exposed to changes in the property value than if you owned a buy-to-let

Handfield-Jones points out that Octopus Property has lent £3.5bn over the past 11 years and has lost 0.01 per cent in capital over this timeframe.

The platform aims to make it as easy as possible for advisers to invest in P2P loans.

“For the financial adviser community specifically, it is about

“ It is very different building a product for financial advisers versus direct-to-consumer”

property. It was about creating a choice for advisers and their clients.”

So, why has Octopus Choice succeeded where other P2P platforms have struggled?

Handfield-Jones puts the platform’s success down to a number of factors. Firstly, the attractions of the underlying asset class and the platform’s lending process. He notes that buy-tolet property remains attractive for professional investors, with Octopus Choice offering investors an alternative to buying directly.

He explains that investors can benefit from a portfolio of property loans that are secured by a first charge and typically have a conservative loan-tovalue ratio of around 60 per cent.

This represents a very different proposition to investing in unsecured consumer loans.

“And Octopus invests five per cent in every loan in what we describe as a ‘first loss position’,” he adds. “Whether you invest £10 or £1m, Octopus Choice puts in five per cent with you. If there is a problem with that loan, we lose our five per cent before the customer or investor loses a penny of theirs.”

having the functionality to manage their clients, arrange whatever charging they have agreed with their clients, and a place where they can look at suitability and third-party due diligence to help them to go through their process of ensuring suitability as a product,” he says.

“It is very different building a product for financial advisers versus direct-to-consumer because the adviser’s job is to make sure the decisions they make for clients are the right ones, based on the product provider’s track record, the type of investment, the underlying client, their stage of life and their own investing goals.”

When it comes to Octopus Choice’s direct clients, HandfieldJones has concerns about investor marketing proposals made in the Financial Conduct Authority’s recent consultation paper on the P2P sector. These could see platforms restricted to marketing to those who are certified or selfcertify as sophisticated or highnet-worth investors.

While he has no issues with the regulator’s suggestion that appropriateness tests should be introduced to help investors to assess the potential risks associated

25

with P2P lending, he is concerned that the proposals could ultimately cause P2P to become the preserve of the wealthy. In his opinion, it would be a very unfortunate consequence to exclude the masses from accessing an above-inflation return on their investments.

“It is relatively easy to do [an appropriateness test], but what we want to avoid is this becoming a high-net-worth proposition,” he explains. “You have got an ISA that is designed for anyone to use, so to restrict an ISA product to become a high-net-worth product does not make much sense.”

Although the industry has a duty of care to make sure that consumers understand what they are investing in, they should also be given the choice to invest their money sensibly, HandfieldJones adds.

“Taking the path of standardisation, providing appropriate information and insight into the risk profile of these products is preferential versus making it difficult to invest,” he says.

Although the UK’s plan to leave the EU has created uncertainty, Octopus Property – which underwrites the loans on Octopus Choice's platform – continues to see strong demand from professional landlords who are buying into residential and commercial property. HandfieldJones points to reports from different regions across the UK, which indicate that demand for rental properties continues to outstrip supply.

“Yes there is uncertainty, but the UK continues to be a great place to do business across so many areas of the economy – and that is not going to change overnight,”

26

PROFILE

he asserts. “I think statistics and surveys are showing that although activity has slowed, there is still underlying structural demand for these asset classes.”

When it comes to the business itself, Handfield Jones acknowledges that Brexit may make it harder to hire talented people with the right skill-set.

Fortunately, the company has created a potential solution by launching a digital academy to train people with the skills that the business requires.

“In a relatively short space of time, we can train people to a fairly high standard if you can apply that learning in real time,” he says.

“That is one of the reasons we launched our academy – to allow us to remain competitive.”

The initiative went live over the summer and was driven by the view that technology is critical to Octopus Choice’s success over the next decade.

“Any business that isn’t adopting

technology at the core will struggle over the next decade,” HandfieldJones remarks.

Looking ahead, the company has ambitious plans to improve its Innovative Finance ISA (IFISA) functionality by launching a digital end-to-end ISA transfer process. They plan to do this by integrating their system with the banking system. This means that if

its IFISA last year and started accepting existing ISA transfers at the start of the year. So far, the platform has attracted 2,500 new IFISA customers and typically sees 50 to 60 new IFISAs opened each week. Handfield-Jones expects these numbers to increase rapidly over the next five months.

It has certainly been a positive year for Octopus Choice and

“ Any business that isn’t adopting technology at the core will struggle”

an individual decided to transfer a cash ISA, they could do so digitally by bank transfer.

“This cuts the transfer time down to days rather than weeks,” he comments. “Also, as it is digital you can track the status and progress of that ISA. We are hoping to be one of the first to launch this into the UK.” Octopus Choice launched

Handfield-Jones hopes that 2019 will bring even greater success.

“In the future, we want Octopus Choice to be a multi-billion-pound platform – and I think there is the potential for that to happen,” he states. “Right now it is about continuing what we are doing, continuing to lend conservatively and providing investors with a lower volatility return.”

DIRECTORY

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INVESTMENT PLATFORMS

The BridgeCrowd is a well-established bridging lender that offers two simple products: a low-rate facility, catering for straightforward cases, and an exclusive ‘valuation only’ product which provides a solution for hard-to-place bridges, e.g. severe, adverse credit or no exit. In short, if something has a value, the BridgeCrowd can lend against it. www.thebridgecrowd.com T: 0161 312 56 56 E: borrowers@thebridgecrowd.com E: investors@thebridgecrowd.com Downing designs products that help investors look after their financial wellbeing, while its investment partnerships support businesses in their ambitions. Its crowdfunding platform, Downing Crowd, allows people to lend directly to small UK businesses, typically through bonds offering returns from three to eight per cent per year. www.downingcrowd.co.uk T: 020 7416 7780 E: crowdfunding@downing.co.uk MoneyThing is a peer-to-business lending platform that offers better deals to lenders and borrowers. It offers individuals great returns on IFISA-eligible investments backed by property or business assets. MoneyThing’s investors have helped businesses across the UK to buy property or fund growth. The platform is FCA regulated and committed to responsible lending. www.moneything.com T: 08000 663344 E: support@moneything.com Wellesley is an established property investment platform, that issues bond investments to the UK retail market. Its core objective is to provide investors with higher rates of return than can be accessed through traditional investment routes, whilst simultaneously providing financing to experienced commercial borrowers within the UK residential property market. www.wellesley.co.uk T: 0800 888 6001 E: info@wellesley.co.uk SERVICE PROVIDERS

Fox Williams is a City law firm with a specialist fintech legal team. Fox Williams delivers commercially-focused and up-to-date fintech legal and regulatory advice on various business models. A key focus area includes P2P lending and it acts for several of the largest P2P lending platforms. www.foxwilliams.com T: 020 7628 2000 E: jsegal@foxwilliams.com

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